The Market’s Been Falling. I’m Putting My Money in
Stocks Anyway.
·
Nov. 16, 2018
The stock market has been plummeting
and my own retirement portfolio has been shrinking.
Am I worried? Sure. But I’m still
buying stocks.
Week after week lately, I’ve been
stubbornly funneling part of my paycheck into diversified equity mutual funds
in the hope of long-term gains, knowing full well that I’ve been losing
money.
It’s not because I’m confident the
market will start a big rally soon. I’m sticking with stocks precisely because
I have no idea where the market is heading, and the statistics show that
mistiming market rallies is excruciatingly costly. And I’m doing it out of
faith in the future. Over the long run, the stock market has produced marvelous
returns. I hope that will still be true, if I wait long enough.
The
dangers of short-term investing are clear. A new, eye-opening study by Doug
Peta, senior vice president of BCA Research in Montreal, points out the danger
of trying to time a long bull market. Mr. Peta analyzed all previous United
States bull markets — defined as an increase in the S&P 500 of at least 20
percent — from 1966 through 2007. He divided each of them into 10 equal
chronological periods.
He found that by far the biggest
returns have occurred at the very beginning and the very end of bull
market runs.
What does this mean now? We don’t know
how much time the bull market that started in March 2009 has left. If it is now
late in its life, exiting early will hurt long-term portfolio returns. And if
the bull market is just getting started, despite its advanced chronological
age, staying on the sidelines will be even worse.
Long-term is the critical thought here.
Based on history — admittedly, an imperfect guide — the market is highly likely
to rise over extended periods, meaning stretches of at least 20 years.
The long-term returns have been
fabulous over the last 40 years. From the end of October 1978 through October
this year, the S&P 500 returned an annualized 11.8 percent, with dividends
included, for a cumulative return of 8,679 percent. That’s 5.6 times the
cumulative return of the Bloomberg Barclays U.S. Aggregate Total Return index,
which tracks the bond market. A stock bonanza that large may not recur, but
substantial, positive returns seem a reasonable long-term bet.
Still,
I wish I were confident that the market will embark on an enriching, upward
climb soon. That could happen: It often does in the autumn, especially after
midterm elections, as I’ve
written recently.
But in the current
climate,
stocks could easily fall much further. When the market is dropping, pouring
more hard-earned cash into stocks may seem perverse. Why place $100 into the
maw of a machine that reduces it to $93.16 in one month’s time?
That is, essentially, what the stock
market did to investments in the S&P 500 index in October, the worst month for stocks in seven years. And that figure doesn’t
include potential fees to investment houses, which can devour cash, even as
your stake diminishes.
Despite a one-day bounce the day after
the midterm elections, November so far has been a mediocre month for the
market. I’ve been wincing as I examine my own portfolio, even though I’ve
buffered my stock holdings with healthy allocations of bonds and cash.
What’s worse, some persuasive analysts
marshal strong arguments that the main trend for stocks at the moment is
downward. “There’s a good chance that the bull market is already over, that it
ended in September, and that a bear market has begun,” said Doug Ramsey, the
chief investment officer of the Leuthold Group in Minneapolis.
Rising interest rates are a disturbing
portent for stocks, he noted, and they are climbing rapidly now. “The rate of
change, not the absolute level of interest rates, is what drives the market,
and the rate of change has been very high,” he said. It’s probably not a
coincidence, he said, that the stock market ran into trouble in late September,
just as bond yields were reaching new highs for the year.
Despite recent declines, Mr. Ramsey
said, the American market is still overvalued. He calculated that stocks need
to fall 25 percent below their Oct. 31 levels in order to reach their median
valuations since 1970. Stocks outside the United States are about 10 percent
underpriced compared with their historical valuations, he said, so there are
better opportunities in market niches around the world.
But
while Mr. Ramsey is concerned about American stocks, he says it makes sense for
long-term investors to stick with them and stocks elsewhere, too, for the
standard reasons. He can’t forecast short-term
market returns accurately either, he said, and equities have provided superior
returns over extended periods.
In a nutshell, he advises: “Ask
yourself, what is the range of stock allocation you’re comfortable with? Once
you’ve answered that, I’d reduce the stock in your portfolio to the lowest
level that is within that range.”
What proportion of stock anyone should
hold is a personal and contentious decision, one that I’ll return to. Mr.
Ramsey said that older retirees should probably hold very little stock. For
nearly everyone else, he puts the lower limit at about 30 percent of a
portfolio that also includes bonds and cash, and the upper limit for stocks at
about 70 percent, depending on market conditions. “I’d also be sure that I
diversified internationally,” he said.
Since
August 2017 I’ve
recommended that investors make sure that they’ve rebalanced their own
holdings, raising the proportion of bonds and perhaps cash, and reducing the
stock portion in portfolios that have become too risky after a great bull
market run. My mutual fund portfolio now contains 58 percent stocks, 27 percent
bonds, with the rest in money market funds. That’s as conservative as I’ve been
in a decade.
And with every paycheck, I’m funneling
more money into stocks, while maintaining that rough portfolio allocation. It
was much more pleasant when stocks were rising relentlessly. But I remind
myself that even if stocks fall for a long while, I’ll be scooping up shares at
cheaper prices. (Dollar-cost averaging is the fancy name for this kind of
investing.)
Eventually, if I wait long enough, low prices now will mean a
bigger payoff later. That’s what I believe, anyway.
Because
the financial future may not look anything like the past, this is an act of
faith, based on history and hope. It’s not a sure thing — but if stocks weren’t
risky, they wouldn’t return as much as they do.
Follow
Jeff Sommer on Twitter: @jeffsommer
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